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After hosting a gathering of the world’s biggest investors in Tokyo last week, BlackRock founder Larry Fink compared the current global interest in Japan to the time when the world was fascinated by the country’s economic “miracle” that lasted through the 1980s.
The words were music to the ears of Prime Minister Fumio Kishida, who had spent the last few weeks trying to convince executives of Blackstone, KKR and sovereign wealth funds like Norges Bank to allocate more money to Japan.
With stock prices trading near a 33-year high, the economy out of deflation, the global uncertainty in China and corporate governance reforms of the past decade finally bearing fruit, it’s not surprising that fund managers who had shown no interest in Japan are suddenly flocking to Tokyo.
Some longtime Japan investors such as Drew Edwards, who runs GMO’s Usonian equity funds, are convinced that the changes are real and are encouraged by Kishida’s plans to reform the country’s asset management industry and labour market.
“When you meet with CEOs who are under the age of 60, they’re not nostalgic of the 1980s and they have clear memories of the 1990s” when the economy slowed down, said Edwards. “This is the generation that is coming into power and they are much more inclined to change.”
Still, some company executives are also wary of the sudden interest in Japan and anxious that new investors could easily be disappointed by the pace of change in Japan and leave quickly before meaningful changes in portfolio allocations are made.
Turning to overseas investors is a sensible and well-tested strategy with a quick outcome, but the lesson from the “Abenomics” era was that it’s not enough. Japanese investors and companies need to have faith in their own markets if Tokyo is serious about unlocking $14tn of household savings and making investment in Japan a long-term bet.
Looking at the market for initial public offerings, the signs at home are not encouraging. Fostering start-ups is already a central part of Kishida’s economic programme but the quality of IPOs in Japan is a serious problem that has deterred many Japanese households from investing in the stock market.
While there is a significant quantity of corporate venture capital going on within Japan’s larger companies, there is a severe shortage of the kind of risk capital that would, in the US or European context, support a company through late stages of venture capital funding. According to CB Insights, venture funding in Japan totalled $4.3bn last year compared with nearly $200bn in the US.
As a result, many start-ups in Japan list their shares well before their global counterparts, leaving retail investors to shoulder the risks. Others choose to do their IPOs elsewhere, as was the case with the five Japanese start-ups that listed on Nasdaq this year. There are also conglomerates — such as ecommerce group Rakuten — listing parts of their businesses in attempts to raise money.
When ispace, a lossmaking start-up that tried to land a spacecraft on the Moon this year, listed in April, sole bookrunner SMBC Nikko took the extra step of asking investors to sign a document confirming that they were aware of the risks of investing in the company.
That was after Morgan Stanley decided against taking part in the IPO after assessing the risks. Its pullout, which was followed by Nomura and another US bank, was seen as significant because it is known for employing one of the industry’s foremost experts on the finance side of space. All four banks and ispace declined to comment.
Ultimately, shares of ispace soared after they were priced 78 per cent below the valuation achieved at its final private funding round. But it would be a healthier market if there were more institutional investors in Japan who are willing to provide the risk capital to support start-ups.
Kishida’s efforts also include a plan to raise the quality of asset managers in Japan and to remove barriers for foreign players to enter the industry. Critics have long argued that asset management firms in Japan need to raise the performance of their funds and provide more attractive products with higher returns. What is puzzling though is that the 14-member panel tasked with reforming the asset managers does not have a single member from inside the industry.
Much of the prime minister’s energy with his “Buy Japan” campaign has been spent looking outside, but it’s Japan that needs to believe in that narrative.
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